Hedging for the food and drink industry

Hedging for the food and drink industry

26th September 2013

Hedging for the food and drink industry

As we are half way through the British Food Fortnight – a national celebration of food and drink which lasts until October – we thought fit to express how World First can assist the Food and Drink industry with currency hedging.

We’ve all committed crimes against food and drink in the past. Whether it was an underdone piece of meat, a spilled glass of wine or attempts at molecular gastronomy that failed miserably, we are all guilty of screwing it up once in a while. My personal food nadir involved the combination of partridge and kiwi fruit: striking? Yes. Tasty, definitely not and I think the less said about it the better. Tastes obviously change, hopefully for the better, as we age. Gaudy is replaced by elegant, overly complicated becomes simple, dated to chic, etc. A similar eye can be cast over the business of currency hedging. The key to success is not to over complicate things. Hopefully this article will allow you to see it that way. Let’s start with what you shouldn’t do:Leaving yourself unhedged is something you shouldn’t do.It’s not suicidal but it reminds me of the picture below.

Simply put, it is highly risky and ill-advised. A bad week for the pound can see it lose 4-6% and can easily turn a profitable line into a loss maker. Something that you’re stuck with for months will act as a real blow to the business and could threaten the future of your firm. There is also no need to take the risk as other products, which we will come on to later, give you all the flexibility that staying unhedged gives you but with none of the associated budgetary fears.

Forward Contracts

Most of you will have heard of, and used, a basic forward contract to protect yourself. The product is a classic and represents a simple, off-the-shelf way of managing an exposure.

Think of it as a microwave meal. It’s not the most gourmet piece, doesn’t have all the spices and provenance of a fine work of cooking but gets the job done and is as reliable as it gets while staying reasonably priced.The forward will allow you to protect a level that nobody can take away from you. It doesn’t however, let you benefit from any upside; we’ll have to go ‘made-to-order’ to get that.

Currency options

So we’ve moved away from the supermarket and into a restaurant and now we’re looking at something comparable to our microwave meal. The story is the same – delicately seasoned meat, rich sauce and crisp vegetable accompaniment – but this is where the similarities end. Instead of merely being able to choose the dish, we’re now able to choose sides, or pair with a wine so as to change this meal into just how we want it to taste. Options give you exactly that: choice.

We’re proud to have been the first UK broker to bring more sophisticated products to the general business market – currency options.

Hedging with currency options allows you to protect your bottom line against fluctuations in exchange rates. Even better, you can also benefit if rates start to move in your favour.